RBC Bearings' Q2 2026: Contradictions Emerge on VACCO-Driven Backlog, Industrial Growth, Aerospace Production, and Margin Outlook

Date of Call: October 31, 2025

Financials Results

• Revenue: $455.3 million, up 14.4% YOY
• EPS: $2.88 adjusted, up 25.8% YOY (GAAP diluted EPS $1.90 vs $1.65 prior year)
• Gross Margin: 44.1% (44.9% adjusted), compared to 43.7% in the prior year

Guidance:

• Q3 revenue expected $454M–$462M (up ~15.1%–17.1% YOY)
• Organic net sales growth for Q3 expected +7.4% to +9.5% YOY
• Adjusted gross margin guidance 44.0%–44.25%; SG&A 17.0%–17.25% of sales
• Continue integration of VACCO and expect operational synergies over time
• Capital allocation priority: deleveraging (term loan targeted to be repaid by Nov 2026)

Business Commentary:

* Revenue Growth and Aerospace & Defense Segment: - RBC Bearings reported Q2 2026 net sales of $455.3 million, a 14.4% increase over last year. - The growth was driven by a 38.8% year-on-year increase in Aerospace & Defense sales, with commercial aerospace expanding 21.6% and defense expanding 73.3%.

• Backlog and Future Orders:
• The backlog increased to $1.6 billion from $940 million in March, reflecting a 60% year-over-year increase.

• This growth was attributed to a combination of VACCO acquisition and strong organic growth, with expectations to approach $2 billion in backlog by year's end.

• Operational Efficiency and Margin Expansion:

• Gross margin improved to 44.1% for the quarter, up from 43.7% last year, with an adjusted EPS of $2.88.

• Margin expansion was supported by increased operating efficiency and the ongoing integration of VACCO, despite dilution from acquisition costs.

• Industrial Business Stability:

• The industrial sector accounted for 56% of revenues, with industrial distribution up 3.3% while OEMs were down 4.7%.
• The stability in distribution was seen amidst weakness in certain markets, reflecting continued demand in the industrial aftermarket.

Sentiment Analysis:

Overall Tone: Positive

• Management: "performance exceeded our expectations" and "good momentum"; backlog rose to $1.6B (from $940M in March) with expectation to approach $2B; Q3 revenue guide $454M–$462M and free cash flow $71.7M, conversion 119.5% — all indicate strengthening demand and financial leverage.

Q&A:

• Question from Kristine Liwag (Morgan Stanley): Maybe following up on the backlog. You had a very strong backlog growth of 60% in the quarter. Can you provide any color regarding how much of that was just from the VACCO acquisition? And also what were the key drivers of that increase? And you talked about expecting $2 billion backlog by year-end—what are you seeing there?
  Response: About $500M of the backlog increase came from the VACCO acquisition; the remainder is >20% organic growth driven overwhelmingly by A&D (90%+ of backlog); management expects to finalize contracts soon and to approach ~$2B backlog by year-end.

• Question from Kristine Liwag (Morgan Stanley): Can you remind us regarding your production rates? What's the utilization of your aerospace plants? And how should we think about incremental operating margins as volume comes through given past inflation and contract changes?
  Response: Aerospace airframe plants are near 100% utilization; the company is adding shifts, manpower and capital to raise capacity each quarter, which should improve absorption and drive margin expansion.

• Question from Michael Ciarmoli (Truist Securities): What was commercial Aero OEM growth and commercial Aero distribution growth this quarter? Also, industrial distribution seemed down sequentially—anything particular there?
  Response: Commercial OEM grew 27.9% this quarter; commercial distribution was roughly flat (down 2%); industrial distribution had a strong Q1 so the QoQ dip reflects lumpy/seasonal order timing rather than demand weakening.

• Question from Michael Ciarmoli (Truist Securities): You noted VACCO diluted margins by ~360 bps—how should we think about VACCO margin expansion and timing to reach RBC margins?
  Response: VACCO runs in the mid-20s adjusted margin today; management expects operational synergies and capacity changes over time to meaningfully close the gap, but it will take multiple quarters/years.

• Question from Steve Barger (KeyBanc Capital Markets): You're adding capacity for aerospace and defense—what revenue level did you direct the team to plan for (A&D and company-wide)? Also, any engineering capacity constraints and are you leveraging AI?
  Response: Management is planning program-by-program rather than a single rolled-up target; specific businesses (e.g., marine Sargent) need to grow from mid‑30s to >$100M quickly; engineering bench is strong with ongoing hiring/training and VACCO adds capability; AI is being used as a rapid design/idea stimulant in engineering.

• Question from Scott Deuschle (Deutsche Bank): For the re‑strike of Boeing and Airbus contracts, do you see the full benefit starting with shipments after Jan 1, or will prior backlog at lower prices delay the benefit? And are renegotiations tracking to expectations?
  Response: Most, if not all, of the benefit should be realized on shipments starting after Jan 1; negotiations were tough but concluded acceptably — neither side fully happy but not disappointed.

• Question from Peter Skibitski (Alembic Global Advisors): Any headwinds from the government shutdown on defense order flow? And any impact from the 777X delay to your near‑term plan?
  Response: No impact from the government shutdown so far; the 777X delay was not part of near‑term plans and would be upside if produced sooner, not a disruption.

• Question from Ronald Epstein (BofA Securities): Any impact from critical minerals/rare earths on your products and how do you vet AI recommendations before trusting them?
  Response: No impact from critical minerals; occasional past issues with exotic stainless steels have largely resolved; AI outputs are used as idea prompts and validated by engineers—AI accelerates iteration but results are reviewed and tested before adoption.

Contradiction Point 1

VACCO Acquisition Impact on Backlog

It involves the impact of the VACCO acquisition on the company's backlog, which is a crucial indicator of future revenue and growth potential.

How much of the backlog increase was due to the VACCO acquisition, and what were the key drivers behind this increase? - Kristine Liwag(Morgan Stanley)

2026Q2: Approximately $500 million of the backlog increase is due to the VACCO acquisition. - Robert Sullivan(CFO)

Can you provide details on the modeling for VACCO's revenue and margins? - Michael Frank Ciarmoli(Truist Securities)

2026Q1: The acquisition of VACCO will more than double our backlog. - Robert Sullivan(CFO)

Contradiction Point 2

Industrial Distribution Growth Potential

It pertains to the potential for growth in industrial distribution, which is a significant segment of the company's business.

What is the growth potential for industrial distribution? - Michael Ciarmoli(Truist Securities)

2026Q2: Industrial distribution has had strong performance, with some large orders, it may not be sequential due to seasonality. - Robert Sullivan(CFO)

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2026Q1: Industrial metrics suggest a strengthening economy, with the Big Beautiful Bill expected to positively influence demand. We expect to double our backlog in the next 12 months. - Michael Hartnett(CEO)

Contradiction Point 3

Aerospace Production and Revenue Growth

It involves differing expectations regarding aerospace production rates and their impact on revenue, which are crucial for assessing the company's growth trajectory.

Are commercial aerospace production rates on a positive trajectory? When will 737 MAX production reach 50/month and 787 production reach 10/month? What growth potential remains for the commercial aerospace OE business at those production rates? - Kristine Liwag(Morgan Stanley)

2026Q2: We expect to see Boeing reach 38 per month for the 737 MAX soon, with a potential transition to builds in the upper 40s by mid-2026 due to FAA approvals. Increasing production rates could result in double the current Boeing commercial OE revenue, considering the full shipset potential. - Mike Hartnett(CEO)

Any updates on commercial aerospace production rates moving to a positive trajectory? When will production rates reach 50 per month for the 737 MAX and 10 per month for the 787? How much larger could the commercial aerospace OE business become at that point? - Kristine Liwag(Morgan Stanley)

2025Q4: We expect to see Boeing reach 38 per month for the 737 MAX soon, with a potential transition to builds in the upper 40s by mid-2026 due to FAA approvals. Increasing production rates could result in double the current Boeing commercial OE revenue, considering the full shipset potential. - Mike Hartnett(CEO)

Contradiction Point 4

Margins and Revenue Growth

It involves differing expectations regarding margin expansion and revenue growth, which are critical for assessing the company's financial performance and future outlook.

What is the expected trajectory for Blackwell's ramp this year and its impact on gross margins? - Timothy Arcuri(UBS)

2026Q2: Gross margins may initially dip to low 70s due to the Blackwell ramp but are expected to recover to mid-70s quickly. - Mike Hartnett(CEO) and Robert Sullivan(CFO)

Can you provide gross margin by segment and comment on margin expansion conservatism? - Michael Ciarmoli(Truist Securities)

2025Q4: Industrial gross margins were 45.7% and A&D margins were 41.5%. Margin expansion is considered conservative, but there's room for growth, especially in A&D segment with increased throughput and contract renewals. - Robert Sullivan(CFO)

Contradiction Point 5

Aerospace Production Rates and Capacity Utilization

This contradiction involves differing statements about the utilization of aerospace plants and the expectations for capacity expansion, which impacts capacity planning and operational strategy.

What is the utilization rate of your aerospace plants, and how should we assess incremental operating margins? - Kristine Liwag(Morgan Stanley)

2026Q2: Capacity utilization for airframe business is at 100%. Additions are being made to capacity through added shifts and manpower. Margin expansion is expected with better absorption of overheads as capacity increases. - Mike Hartnett(CEO)

Is Aerospace expected to grow at mid-teens with mid-teens comps next year? - Steve Barger(KeyBanc Capital Markets)

2025Q3: First, if you look at our airframe business, capacity utilization is about 90% right now. Over the next - certainly over the next 18 months, we expect to increase capacity. - Mike Hartnett(CEO)